Retail store credit cards and secured credit cards are
a fast, easy way to improve your credit score.Â
Applying for new credit cards improves your credit score two different ways.
First, your total credit limit goes up. The increased credit limit automatically reduces your credit card use percentage, which makes up 30% of your credit score. It has the second biggest impact on your credit score.
Second, your number of accounts goes up. This is a long-term strategy with two phases. Your credit score will fall about 5 points when you open a new account. However, more accounts today will increase your average age of accounts tomorrow, and average age makes up 15% of your total score.
There are three types of cards that typically get approved even with poor credit:
- Retail store credit cards like Fingerhut
- Secured credit cards like Secured Mastercard® from Capital One®
- Credit cards for poor credit (scroll down to see why these are not my favorite). Â
1. Retail store credit cards
These cards are offered during check-out in the big retail stores like Kohl’s, Walmart, and Target.
Make sure the card has a Visa or Mastercard logo. You can use it anywhere, and your activity gets reported to the credit bureaus. Do not apply for a store charge card, where all your purchases must be paid each month. Charge cards are not credit cards. They are not reported to the credit bureaus, so they will not improve your credit score. Â
Retail store cards tout instant approvals, but the credit limit is usually only $300 to $500. Use your card for small purchases and keep the outstanding balance below 29% of your credit limit ($87 for a $300 limit or $145 for a $500 limit). These cards normally increase the credit line every six months when you maintain a good payment record. Â
Most retail score cards require a minimum credit score of 640. However, Fingerhut has created cards especially for people who are building their credit. Most applications get approved, and card holders see an average increase of 30 points in their credit score.
2. Secured credit cards
These cards get a bad rap because they require a security deposit, and the credit limit is the same as the deposit. Some financial advisers say secured cards are the same as a debit card that comes with your savings or checking account. I disagree with those advisers, because debit cards are not reported to credit bureaus and they will not help your credit score.
I recommend good secured cards over credit cards designed for poor credit (read why in the next section). A reputable program like Secured Mastercard® from Capital One® has many strong benefits. There is no annual fee. The initial credit line is $200, but the account gets reviewed automatically for line increases every 6 months. Plus, Capital One is known for their outstanding customer service. One thing we do not like is the high interest rate, which is currently 26.99%. However, you can avoid any interest charges when you pay off the balance each month. A secured card with a high interest rate is a great way to build your credit, but do not use it for large purchases.  Â
Capital One approves almost every application, because the security deposit reduces their risk. However, they will decline an application when the person has been turned down by another credit card company during the prior 3 months or when the applicant has defaulted on two or more loans in the past. Â
3. Credit cards for poor credit
I advise my clients to avoid most cards designed and advertised for poor credit. Some are good, but the bad ones are terrible. Most do not require a security deposit, which sounds great in their ads, but they often charge an application fee just to process the paperwork (non-refundable if declined). Their credit lines are low. The interest rates are as high as 35%. And there could be a monthly processing fee.
When you add all these charges together, you could be looking at hundreds of dollars the first year.
I advise my clients to save that money in an account, and use it to open a secured credit card account. Most people get a better deal that way. Â Â Â
Conclusion
What are best credit cards for poor credit?      Â
Credit cards are one of the best ways to build up your credit rating. There are three major options: retail store cards (be sure to get the Visa or Mastercard version), secured credit cards, and credit cards for bad credit. We advise our clients to choose a secured card over a credit card designed for bad credit, due to the added expense from application fees and monthly administrative fees. Â Â
There are two tricks that will make credit cards work for you. First, don’t charge more than 29% of the credit limit. For example, $145 for a card with a credit limit of $500. And second, pay off the entire balance each month. Don’t be tempted to carry over any unpaid charges. These cards have high interest rates, which means you’ll pay a ton of money for interest charges.
Use these high rate cards to build up your credit over 6 to 18 months. Then use your improved credit score to get a credit card with a lower interest rate or cash back rewards.
Don’t close any of these accounts, even after you qualify for a credit card with a lower interest rate. Use it once every few months to keep it active. More accounts, and older accounts in your credit bureau file will add another 15% to your total score.   Â